Revenue friendly amendments must be prospective- revenue must not un-necessarily indulge into litigation by applying retrospectivity.

[CA DEV KUMAR KOTHARI]

Recent judgments holding amendment prospective:

Commissioner of Income Tax -III, Pune Versus Rajasthan And Gujarati Charitable Foundation Poona 2017 (12) TMI 1067 - SUPREME COURT

Commissioner of Income Tax (Exemption) Versus Raguvanshi Charitable Trust 2017 (12) TMI 135 - DELHI HIGH COURT

Commissioner of Income Tax (Exemption) Versus Seth Anandram Jaipuria Edu. Society Cantonment Kanpur - 2017 (3) TMI 896 - ALLAHABAD HIGH COURT

The Director of Income-tax, Exemptions, Bangalore, M/s. Karnataka Reddy Janasangha M/s. Gokula Education Foundation, MS Ramaiah Nagar and anothers Versus Al-Ameen Charitable Fund Trust and Others - 2016 (3) TMI 462 - KARNATAKA HIGH COURT

DIRECTOR OF INCOME TAX Versus VISHWA JAGRITI MISSION - 2012 (4) TMI 289 - DELHI HIGH COURT

Recent cases - some amendments relating to  Charitable institutions:

Vide THE FINANCE (No. 2) ACT, 2014, w.e.f. 1st day of April, 2015 for example, in section 11 two subsections were inserted being sub-section (6) and (7). Some amendments were also made on similar lines in other exemption provisions in S.10.  The relevant clause in the Bill, and the finally enacted provisions clearly mentions that the amendment is w.e.f. 01.04.2015 means from AY 2015-16. Still revenue carried matter up to the Supreme Court contending that newly inserted sub-section (6) should be applied retrospectively. The Supreme Court had upheld view taken by High Courts and Tribunals that the amendment is prospective.

Effective date of amendment:
 Usually in the proposals to amend any provision the effective date is mentioned in the proposed clauses, in notes and memorandum explaining proposals. These are very clear. In case any amendment is proposed to have retrospective effect, then it is so mentioned from the stage of Bill.  Therefore, revenue should not raise dispute on the aspect of applicability with retrospective effect.

Amendment should not be retrospective and in nay case should not go beyond last amendment:  

Every year at least a Finance Bill is introduced, publicly discussed, discussed in Parliament, and passed (with or without modifications). There are other amendment enactment also passed in many situations. Therefore, logically and as policy, any amendment should not be so made so as to give retrospective effect at all. In any case the retrospectivity should not go beyond the effective date of last amendment in the tax related enactments.

Retrospective amendments make tax provisions and finance of tax payers uncertain. For the government fiscal effect is usually not enormous, but for taxpayer it can create big burden on account of extra demand for tax, interest, penalty etc. and in administration of tax aspect to deal with effect of retrospective amendment.

Explanatory amendment must also be prospective:

For credibility of government, the government machinery including law ministry and concerned ministry and their legal team it is desirable that any provision should be enacted after giving careful consideration of all aspects and there should not be need to make explanatory amendments.

A retrospective amendment definitely place a big question mark on the ability of concerned teams of government. That clearly shows that original amendment was either not well worded or that an amendment is made just because the Supreme Court has allowed some sorts of amendments to be made retrospective or to be interpreted to be retrospective. This has really created thinking and approach of ‘who care…’? this is because feeling is that amendment can be made any time and with retrospective effect. Even if amendment is not made retrospective revenue can try to consider it retrospective as explanatory.

Retrospective amendments should never be in favour of revenue:

It is unfortunate that many retrospective amendment have been made in past only because of bias, and show of strength. Amendments have been made due to which negligible revenue collection might have been made. For example,  (a) hospitality of any kind (eg. tea, coffee, snacks.. etc.) were included in definition of entertainment- this was after ruling of the honourable Supreme Court  in Commissioner of Income-Tax Versus Patel Brothers And Co. Limited. And Others 1995 (5) TMI 2 - SUPREME Court

 (b) Tea bushes were excluded from wider meaning of ‘plant’. This amendment was made after Tribunals have held that tea bushes were plant in case reported as Assistant Commissioner Of Income Tax Versus General Fibre Dealers Pvt. Ltd. 1993 (1) TMI 254 - ITAT KOLKATA.

These amendments were made retrospective w.e.f. 01.04.1961.

In the overall context of tax collection by GOI the impact of these amendments will be miniscule for the government. However, for small taxpayers the effect can be very significant even if additional liability of few lakh rupees is imposed due to such amendments on small organizations because with tax he will be burdened with interest and can also be burdened with penalty. 

Such amendments cannot be given full effect also For example, in case of entertainment expenses in large number of cases hospitality expenses were allowed by AO. CIT(A), ITAT, High Courts and the Supreme Court. The question is in how many cases revenue could give effect of retrospective amendment of meaning of entertainment?

The answer is that it is most likely that only in case of pending proceeding effect to such amendment can be given besides some newly made assessments can be looked into and effect may be given by tax authorities, if at all it be so possible.

It appears that these amendments were made, that too with retrospective effect merely just due to bias of concerned bureaucracy, though with approval of legislature – who hardly discuss such provisions. There have been many more amendments made without considering real impact on revenue. For example, amendment in S.43(3) to exclude buildings and furniture from meaning of plant. This will have not much impact in any year and no impact if few years are considered because if rate of depreciation is lowered, the period of allowance will increase but total allowance will not change. Benefit of accelerated depreciation for any assessee can be significant but for the revenue as whole there is not much impact.

Policy decision about amendments:

To improve certainty and stability of legal provisions and credibility of the Government and its machinery and also to work in result oriented manner it is desirable that amendment in tax law should be made with due care and after taking into account all aspects. The amendment should generally be prospective. Only for garnering few thousand crore rupees amendment should not be made to give retrospective effect. Collection of few thousand crore rupees may take place but it decorate goodwill and reputation of Government and its tax policies which cannot be measured in terms of money.

Before making any amendment the following aspects should be considered:

a. Whether it is desirable to disturb settled legal position?

b. Whether retrospective effect can be implemented in all cases?

c. Whether retrospective amendment will create inequality- because it can be implemented in some cases ( where proceeding is pending) and not in other cases )where there is no pending proceeding and new proceedings will be barred by limitation. 

d. How many taxpayers are likely to be effected, and what is range of tax to be collected from such taxpayers?

e. Whether additional revenue likely to be collected is very high so that the government can face impairing its goodwill for such sum?

f. Whether it is desirable to create atmosphere of uncertainty and contingencies in respect of tax laws?

Request for clear instructions:

It is desirable that there should be clear instructions that an amendment which is made effective from a particular date should be so considered and tax authorities should not initiate and perpetuate litigation by trying to consider it explanatory and retrospective.

It is unfortunate that tax authorities are indulging into litigation and perpetuating litigation before higher forum also. This is in spite of clear instructions of CBDT not to indulge into litigation in some situations (e.g. low tax effect and settled legal position) and also to withdraw pending appeals when tax effect is lower than prescribed limit or settled legal issues.